FinanceMind

building financial freedom

FinanceMind

building financial freedom
FinanceMind » Personal Budgeting » Analyze Cash Flow

Analyzing Your Cash Flow


On this page, you will:

  • learn how to analyze your cash flow.

Your personal cash flow statement can tell alot about you. It can tell your income nature, your spending habit and lifestyle.

Annual Cash Flow.

In the Cash Flow Calculation Example, the Annual Cash Inflow is $840. If the cash flow is negative, we call this as Annual Cash Outflow.

If the Annual Cash Flow is:

  • Negative: You are not earning enough cash to sustain your current lifestyle. Most likely you are subsidising the shortfall in cash by using borrowed money such as personal loan or using credit cards. If you are not careful, you will sink deeper into debt. You need to start spending less than you earn if you ever want to achieve financial freedom.

  • Exactly Zero: You can barely sustain your current lifestyle. If you do not have a savings buffer and if you become unable to work or your income streams suddenly stop then your lifestyle will be affected. If you have goals, then you will need to adjust your lifestyle so you can find extra cash to channel towards your goals.

  • Positive: This is a good start. You have extra money leftover after all your spending. You can channel this money towards your goals or invest wisely.

Inflow Over Outflow Ratio

The Inflow Over Outflow Ratio can provide some useful insight into your financial health. To get the Inflow Over Outflow Ratio, you take your Total Cash Inflow divided by Total Cash Outflow. Then you multiply it by negative 1 to get a positive ratio.

If the ratio is:

  • Less than 0.80: You are spending a lot more than you can afford. Probably you are also in some debt and you are finding it difficult to service your debt. You should seek professional guidance on how to manage your cash flow and spending. One of the first things you can do is to put a stop on all your spending immediately. Spend only if you have to. Do this for a month and see if there is any improvement in your cash flow. Yes, this is a drastic approach but it is better than being a bankrupt. If you can survive one month on this approach, chances are you can adopt this lifestlye.

  • Between 0.81 to 0.99: You are slightly overspending. However, if you examine your spending habit, most likely you will be able to cut some excess spending. Aim for a ratio of between 1.1 to 1.2. As you move on, aim to improve your ratio further.

  • Between 1.0 to 1.2: You are spending less than you earn. Congratulations! You have satisfied the fundamental law in wealth building. Save your extra cash and invest wisely. Aim to improve your ratio as you move on.

  • If your ratio is 2: This means that in 1 year, you are earning enough money for 2 years' spending.

  • If your ratio is 3: This means that in 1 year, you are earning enough money for 3 years' spending.

Clearly the higher the ratio, the more comfortable you will be and you should always keep improving your ratio.


Next: Build Your Net Worth Statement.

Previous: Building Your Cash Flow Statement.